The Dodd-Frank Wall Street Reform and Consumer Protection Act changed the standard for determining whether a natural person qualifies as an "accredited investor" on the basis of his or her net worth, by requiring that the value of his or her primary residence be excluded in the net worth calculation. The change was effective in July 2010 upon enactment of the Dodd-Frank Act, which also required the SEC to revise its rules under the Securities Act of 1933 to reflect the new standard. On January 25, 2011, the SEC released its proposed rules on the subject. Public comments are due no later than March 11, 2011. Under rules promulgated pursuant to the Securities Act of 1933, issuers are permitted to offer and sell securities to "accredited investors" in specified private and other limited offerings without registration of the offering under the Securities Act. One way an individual may qualify as an "accredited investor" is if his or her net worth, or joint net worth with a spouse, exceeds $1 million.
The Dodd-Frank Act specified that the value of an individual's primary residence – previously included in the net worth calculation – must be excluded in determining whether that individual's net worth exceeds $1 million. The SEC's proposed rules would implement this change by adding the emphasized language below to the "accredited investor" net worth standard in Securities Act Rules 501 and 215:
"Any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of purchase, exceeds $1,000,000, excluding the value of the primary residence of such natural person, calculated by subtracting from the estimated fair market value of the property the amount of debt secured by the property, up to the estimated fair market value of the property."
This proposed language makes clear that any debt secured by such property (up to the fair market value of the property) may also be excluded from the net worth calculation. This was not clear from the Dodd-Frank Act, but the SEC believes this approach is consistent with its regulatory purposes. The proposed language is consistent with previous guidance the SEC's Division of Corporation Finance provided on July 23, 2010.
In addition to the required change described above, the Dodd-Frank Act also authorized the SEC to consider and make additional adjustments to the "accredited investor" standard as it applies to natural persons. The SEC is not proposing to make any additional changes at this time, but expects to consider the issue in the future.
The SEC's proposed rules solicit comment on a number of related matters, including:
- whether, how, and to what extent any debt secured by the primary residence should be excluded from the net worth calculation;
- whether "primary residence" should be given a definition, and if so, what definition;
- whether a different timing is appropriate for making the net worth calculation;
- whether additional rules are needed to clarify the calculation of net worth; and
- whether any transition rules are necessary or appropriate in connection with the amendments